Technology|Huawei and ZTE Hit Hard as U.S. Moves Against Chinese Tech Firms

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Huawei and ZTE Hit Hard as U.S. Moves Against Chinese Tech Firms

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Huawei made a big push in the United States with a new smartphone this year, but that was derailed when AT&T, appearing to bow to government security concerns, walked away from a deal to sell the phone.CreditCreditMarlene Awaad/Bloomberg

The United States undercut China’s technology ambitions on Tuesday, advancing a new rule that would limit the ability of Chinese telecommunications companies to sell their products in this country.

The Federal Communications Commission voted unanimously to move forward with a plan that would prevent federally subsidized telecommunications carriers from using suppliers deemed to pose a risk to American national security. The decision takes direct aim at Huawei, which makes telecommunications network equipment and smartphones, and its main Chinese rival, ZTE, sending a message that the government doesn’t trust them.

A day earlier, the government barred ZTE from using components made in the United States, saying the company had failed to punish employees who violated American sanctions against North Korea and Iran.

The moves intensify an already testy fight between China and the United States for high-tech supremacy. Although tensions have simmered for years, the two economic powerhouses are threatening a global trade war as they look to protect their most advanced industries.

Long bedeviled by political concerns about its ties to the Chinese government, Huawei (pronounced “HWA-way”) has spent the better part of the last decade trying to sell its equipment and phones in the United States.

The company made a big push in the United States with a new line of smartphones this year. But that effort was derailed when AT&T, appearing to bow to government security concerns, walked away from a deal to sell the devices.

Since then, Huawei has signaled that its political battles in Washington may be all but lost. The company has been dialing back on government outreach in the United States, including lobbying, and last week it cut key staff there, according to people familiar with the matter. The new F.C.C. rule, which would become final with a second vote, could kill off what little equipment business Huawei has in the United States.

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A factory at ZTE headquarters in Shenzhen, China, where Huawei is also based. On Monday, the United States barred ZTE from using American-made components.CreditBrent Lewin/Bloomberg

These are uncertain times for tech companies, whether American or Chinese, that are trying to do business across the Pacific. The two nations are playing an aggressive game of one-upsmanship, both to support their own companies and guard against threats to national security. Last month, the Trump administration accused Beijing of stealing American know-how as part of its ambitions to transform the Chinese economy, prompting tit-for-tat tariffs.

The latest moves against Huawei and ZTE mean that American companies like Apple and Qualcomm could soon be caught in the crossfire — and they have a lot to lose. Apple, for example, sold $46.5 billion worth of iPhones and other products in mainland China, Taiwan and Hong Kong last year. That was about 20 percent of its total sales.

Wealthy Chinese consumers have gravitated toward Apple, and President Xi Jinping and the Communist Party still aim to keep the public happy. But there are limits to Apple’s leverage in the country.

“Beijing will not sit idly by,” said Paul Triolo, who leads global technology policy analysis at Eurasia Group, a geopolitical risk consultancy. “Chinese officials will likely pause to digest this move, and the series of other trade and investment moves coming at them in waves, before deciding how best to respond. It is likely to get ugly before it gets better.”

Beijing could use its broad cybersecurity laws to steal the core computer code of American companies operating in China, said Dean Garfield, head of the Information Technology Industry Council, a trade group that represents the largest American tech companies. The Chinese government also could walk back recent commitments to allow more financial and electronic payments services from Mastercard, Visa and JPMorgan Chase. Or it could simply restrict American companies’ ability to do business in China, he said.

For ZTE, this week’s sanctions are a nightmare come true. The company’s smartphones and network gear rely on American microchips and software, which means it could need to redesign as much as 90 percent of its product line.

ZTE and Google, which supplies the Android operating system in the Chinese company’s phones, are concerned that the ban may prevent ZTE from licensing the software, according to a person familiar with the discussions but not permitted to speak publicly on the matter. No conclusion has been reached yet, the person said.

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A line outside an Apple store in Beijing. The latest moves against Huawei and ZTE mean that American companies like Apple and Qualcomm could soon be caught in crossfire.CreditEPA, via Shutterstock

Huawei is a global telecommunications equipment powerhouse, with $93 billion in revenue last year. It has spent millions trying to pry its way into the United States but found few takers — save for smaller, rural telecom companies that receive federal subsidies and would likely be barred from working with it by the F.C.C. rule.

Huawei’s troubles in the United States have been mounting since 2012, when a congressional report warned that its gear could be used to spy on Americans or to destabilize American telecom networks. The company spent $1.2 million on lobbying that year. Last year, it spent $60,000.

Major American carriers such as Verizon and AT&T have since shunned Huawei. The Commerce and Treasury Departments have subpoenaed it over possible violations of American sanctions on Iran and North Korea. And bills are before Congress to stop government agencies and contractors from buying Huawei products.

In January, researchers discovered security flaws in the microprocessors inside nearly all of the world’s computers. A Senate committee wrote to Huawei’s founder to ask what the company knew about the vulnerabilities, and how it had been affected by them. Huawei decided not to respond.

Then, last week, Huawei laid off five American employees, including William B. Plummer, the executive who was the face of its Sisyphean efforts to win over Washington.

The company has said repeatedly that its products pose no security risk and that it complies with the law everywhere it operates. Still, the layoffs appear to be an acknowledgment by Huawei that it has failed to clear the political cloud around it.

“Some things cannot change their course according to our wishes,” Eric Xu, Huawei’s deputy chairman, said at the company’s annual meeting with analysts on Tuesday in its home city, Shenzhen. “With some things, when you let them go, you actually feel more at ease.”

Mr. Plummer, who was Huawei’s vice president of external affairs, had been with the company for almost eight years. He was the most senior member of Huawei’s American policy team who was not a Chinese citizen.

It is not clear whether he will be replaced. The company’s policy operations in the United States are led by a relatively recent arrival, Zhang Ruijun, who took the post nine months ago after working for the company in Mexico and Russia.

A Huawei spokesman said in a statement that any layoffs simply reflected an effort to better align resources with “business strategy and objectives.”

“Any changes to staffing size or structure are simply a reflection of standard business organization,” he said.

In the United States, Huawei customers that would be affected by the F.C.C.’s proposed rule — small cellular carriers, largely in rural areas — may soon need to find new equipment suppliers.

These carriers love Huawei gear, said Carri Bennet, general counsel for the Rural Wireless Association, an industry group for American telecom companies with fewer than 100,000 subscribers.

The association’s members have even elected a Huawei executive, William Levy, to their board.

Ms. Bennet said that rather than blacklisting specific manufacturers, Washington should be creating a system for testing telecom gear for security vulnerabilities.

“These companies who are reliant on this support, they don’t have the funds to overhaul their whole network,” she said. “Public safety, getting 911 services, broadband — it all just starts falling apart.”